Chris Weston, Chief Market Strategist at IG Markets
Traders are asking if the central-bank-easing-inspired move in developed equities has run its course. Judging by the moves in Asia, US futures and our opening European calls, it certainly seems like a period of reflection is upon us.
Politics is the buzzword today, with Australian leader Tony Abbott maintaining his position as ‘captain’ of the country. However, a third of his party voted for his position to become vacant so I suspect we may see Mr Turnbull leading if we see one more stumble.
Still, despite a political landscape more akin to Italy than one which has avoided a recession for over 20 years, we haven’t really seen the drama result in any major loss of confidence. All the selling of the domestic currency has been driven by China’s poor trade data and the near-20% decline in its January imports.
The ASX 200 finally succumbs to profit taking
The ASX 200 has shed around 0.4%, with the late session sell-off in the S&P 500 providing the perfect reason for those lucky enough to have caught the body of the rally take some profit off the table. There hasn’t really been any talk of politics playing into trading strategy, however. If anything, it’s been more of nuisance than anything, providing traders with more noise to sink their teeth into.
We haven’t even seen any major concern at a currency level due to the hardened stance from the Greek Prime Minister, who stated they need to keep to the mandate that saw the Greek people vote them in.
Mr Tsipras’s comments are aimed at wresting back some control after the eurozone ‘Troika’ were the dominant force last week. Most in the market still feel an extension will be granted to the Greek government, although the structural issues still make this a dire situation.
Alan Greenspan’s comments that the issues won’t be resolved without Greece leaving the eurozone resonated on the trading floors. It’s comments like these that bring back memories of 2012 and should dominate market thinking for the next few weeks.
Currency traders showing little concern around Greece
EUR/USD is flat on the session, which has seen given traders the confidence to buy our European out-of-hours markets today. It seems that, for EUR/USD to trade through the 25 January low of $1.1097, we are going to need to see the market believe there won’t be an extension to the funding program. Bond and swap rates need to adjust further and the premium that US treasuries command over German-to-peripheral debt has to increase.
European growth numbers are also due this week and, after some good news in the shape of the European commission increasing their growth forecasts for 2015 and 2016, the bulls will be hoping for further good news in a market where we are just so used to consistent pessimism.
That same pessimism can’t be shared in the US, where headline job creation is so strong that the three month average (+336,000 jobs) is at the highest since 1997 – coincidentally, this is when the fed funds rate was at 5.5%. Much of today’s conversations have been around when the Federal Reserve will raise rates and the strong headline jobs print clearly caught the market off guard, with the US two-year treasury closing up a huge 12 basis points.
The market is now priced for a move in September and therefore the March FOMC meeting will be closely watched to see if the board removes its ‘patient’ stance on rates. Keep in mind that Janet Yellen is due to lay out her monetary policy report to Congress on 24 February (what is also known as the Humphrey Hawkins testimony). Traders will be closely watching this event for signs of a change of stance in March.
It is worth pointing out that global equity markets are expansive now if we simply look at basic price-to-earnings ratios, with the ASX 200 still trading on a 10% premium to its long-run average. The S&P 500 is trading closer to 18 times forward earnings, and will need to achieve double-digit growth for investors to feel secure about the upside.
I guess you can look at the equity market relative to the bond market and make a call that value is still compelling. We are now in the tail end of the US earning season, while in Europe and Asia earnings season kicks into gear. It seems we need to see a new catalyst other than just central bank policy, otherwise markets will show greater short-term vulnerabilities.